Why shares in this ASX dairy producer are on watch today

Shares in Synlait Milk Ltd (ASX: SM1) are on watch today after the dairy producer released its half year results in the midst of market turmoil.

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Shares in Synlait Milk Ltd (ASX: SM1) are on watch today after the Kiwi dairy producer released its half year results in the midst of market turmoil. Shares in Synlait have fallen 30% in the current market maelstrom. The company has reported mixed results today with revenues up but profits down, which may put further pressure on the share price. 

Synlait's half year results 

Synlait reported a strong increase in revenue, which was up 19% to $559 million, driven by strong growth in infant formula sales and a lift in commodity prices. Sales of consumer packaged infant formula were up 22%, albeit at lower margins. Lower sales of infant base powders were reported due to China infant nutrition market consolidation. 

Earnings before interest tax depreciation and amortisation (EBITDA) of $67.6 million were recorded, in line with 1HFY19. Gross profit reduced marginally during the half, falling to $82.9 million from $85.9 million in 1HFY19 due to an increase in overhead costs. Overhead costs increased by 27% during the half driven by increased employee costs, the establishment of a China sales office, and an increase in Synlait Pokeno overheads. 

Net profit after tax (NPAT) declined 30% to $26.2 million due to higher depreciation and interest costs attributable to growth investments. Earnings per share fell to 14.61 cents from 20.82 cents in 1HFY19. 

Full year guidance is for NPAT of $70–$85 million, with core earnings remaining sound. Cost reduction is a focus moving forward with more than $10 million in operating costs deferred and rephased during FY20.    

Debt 

Net debt increased substantially during the half to $447.4 million, up $159.7 million. $220 million in capital expenditure was incurred during the half to create a second infant-capable manufacturing facility in Pokeno and an advanced dairy liquid packaging facility at Dunsandel. 

Additional debt will be drawn down to facilitate the acquisition of Dairyworks and farmlands adjacent to the Dunsandel facility. Synlait forecasts that it will remain within banking covenant leverage ratios, despite high capital expenditure and lower profit guidance. 

The acquisition of Dairyworks by Synlait is due to settle on 1 April 2020 at a price of $112 million. Synlait is forecasting the acquisition will provide a sustainable earnings stream of approximately $15–20 million in EBITDA. This will emerge over the next 2 years as growth momentum and synergies are realised. 

Coronavirus update 

Synlait reports the coronavirus has had no significant operational impact to date. The dairy company is seeing some pressure on its broader supply chain, particularly container space availability and shipping schedules. This is being managed through strong relationships with raw material suppliers and logistics partners, which are being leveraged to gain forward views of export capacity. 

Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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